Horizon Therapeutics PLC (HZNP) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Horizon Pharma PLC second-quarter 2015 earnings call. As a reminder today's conference call is being recorded.

I would now like to introduce and turn the call over to John Thomas, Executive Vice President, Strategy and Investor Relations. Please go ahead, sir.

Thank you, Abigail. Good morning, everyone, and thank you for joining us. On the call with me today are Tim Walbert, Chairman, President and Chief Executive Officer; Paul Hoelscher Executive Vice President, Chief Financial Officer; Bob Carey, Executive Vice President, Chief Business Officer; Dr. Jeff Sherman, Executive Vice President, Research and Development and Chief Medical Officer; and George Hampton, Executive Vice President, Orphan and Primary Care Business Units and International Operations.

Tim will provide a high-level review of our strong second-quarter results and an update on the business. Paul will provide additional detail on our financial performance. Bob will review the current M&A environment and capital markets and Jeff will provide an update on our clinical development programs for orphan medicines. Tim will then provide some closing remarks and then we will take your questions.

In addition, I wanted to also mention that on June 27, Horizon Pharma was added back to the US Russell 2000 and 3000 Indices as part of the 2016 Russell reconstitution.

As a reminder, during today's call we will be making certain forward-looking statements including financial projections and the expected timing, outcomes and impact of future events. These statements are subject to various risks that are described in our filings made with the Securities and Exchange Commission including our annual report on Form 10-K for the year ended December 31, 2015, subsequent quarterly reports on Form 10-Q and our earnings news release which was issued this morning.

You are cautioned not to place undue reliance on these forward-looking statements and Horizon disclaims any obligation to update such statements.

In addition on today's conference call, non-GAAP financial measures will be used. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today that are available on our investor website at www.HorizonPharma.com.

We have also posted an investor presentation that summarizes our second-quarter results.

With that, I will turn the call over to Tim. Tim?

Thank you, John, and good morning, everyone. Today we reported record sales results with second-quarter 2016 net sales of $257.4 million representing year-over-year growth of 49% and adjusted EBITDA of $121.1 million representing year-over-year growth of 59%. Adjusted EBITDA in the second quarter was 47% of sales. Both our net sales and adjusted EBITDA results exceeded our expectations for the quarter.

Importantly, our rare disease medicines, RAVICTI, BUPHENYL, ACTIMMUNE and KRYSTEXXA represented 36% of our total net sales in the second quarter compared to 28% of net sales in the second quarter last year.

As we reported last week, we continue to be in discussions and negotiations with several PBMs and payers regarding expanding access for our primary care medicines and we secured formulary status for DUEXIS and VIMOVO with CVS Caremark which provides greater long-term durability for our primary care business.

We are also tracking well against our strategic priorities for the year and this morning we confirmed our full-year net sales guidance of $1.025 billion to $1.050 billion as well as our adjusted EBITDA guidance of $495 million to $510 million which would represent a strong year-over-year growth at the midpoint of 37% and 39% respectively.

In addition, our balance sheet is strong and our leverage ratio is low. At June 30, our net debt of $860 million to our last 12 months adjusted EBITDA leverage ratio was 1.9 times which we believe gives us significant flexibility for future acquisitions. We also continue to generate strong annual cash flows which Bob will discuss shortly.

As you know, in January we closed our acquisition of Crealta which brought us KRYSTEXXA, an orphan biologic for chronic refractory gout. In May, we announced agreement to acquire the worldwide rights for interferon gamma-1b, known as ACTIMMUNE in the United States. Obtaining the worldwide rights solidifies our investment in the medicine and the pending outcome of additional clinical trials specifically in Friedreich's ataxia. It strengthens our ability to also expand our global operations. We expect this transaction to close by the end of the year.

I will now walk through our second-quarter in more detail where our 49% second-quarter net sales growth was driven by strong execution across each of our business units.

In our orphan business unit which includes ACTIMMUNE, RAVICTI and BUPHENYL, sales increased 51% year-over-year. Sales growth for both RAVICTI and ACTIMMUNE increased sequentially from the first quarter as well as year-over-year. We continue to drive new patient starts and we are increasingly improving the compliance and persistency rates as well.

Given the relatively low market penetration of each medicine, we have significant opportunity to help many more patients over time and drive sustainable long-term growth for these critical orphan medicines in their currently approved indications.

Also in the second quarter we submitted a supplemental new drug application for RAVICTI in the US to expand the current age range from patients two years of age and older to patients two months of age and older. We currently anticipate a standard ten-month FDA review for this supplemental application resulting in a potential expansion of RAVICTI into this age group next year.

Outside the US, we anticipate launching RAVICTI in Canada later this year and Europe in 2017.

As I mentioned last quarter, we have completed enrollment in our Phase 3 trial for ACTIMMUNE for the ultra orphan neurologic disease, Friedreich's ataxia or FA. If the data proved positive, we believe it will be a transformational opportunity for the estimated 3700 patients with FA in the US. These patients many of them whom are children and young adults currently have no treatment options available to them at this time.

If approved, the launch of ACTIMMUNE for FA would also be transformative for the Company. We estimate that peak US sales in FA could be $500 million to $1 billion annually. Assuming positive data at the end of the year, we would plan to submit our supplemental BLA for ACTIMMUNE in the first quarter of next year. Jeff will discuss our Phase 3 trial in greater detail in his comments.

ACTIMMUNE is also being evaluated in combination with a PD1 checkpoint inhibitor in both kidney and bladder cancer in a Phase 1 investigator initiated trial. The first six patient cohort was completed in May and the second six patient cohort is currently enrolling. We anticipate data from this Phase 1 dosing trial in 2017.

Next, our rheumatology business unit which includes KRYSTEXXA for chronic refractory gout as well as RAYOS, our delayed release prednisone medicine. RAYOS net sales increased 18% year-over-year and KRYSTEXXA generated $20 million of net sales in the first full quarter since we acquired it as part of the Crealta transaction. RAYOS total prescription volume increased 34% in the second quarter year-over-year following improved commercial execution during the quarter and a broader and deeper coverage of the rheumatology market with our sales force.

KRYSTEXXA is a highly effective orphan biologic medicine indicated for chronic refractory gout population that we estimate to be between 40,000 and 50,000 patients. It is the first and only FDA approved treatment that rapidly reverses disease progression for these gout patients. As we have learned more about this medicine in the last months both commercially and clinically, we are beginning to fully realize the opportunity for KRYSTEXXA use by rheumatologists as well as the dramatic benefit it can have for so many patients debilitated by chronic refractory gout.

We continue to believe that KRYSTEXXA peak sales could exceed $250 million annually and our experience to date gives us even more confidence in the ultimate long-term potential of this medicine. We are just beginning to capitalize on the expansion of our KRYSTEXXA sales, marketing and medical affairs efforts where we have seen an increase in benefits and investigations which is the leading indicator for future new start patients.

As you know in the first quarter, we expanded our commercial team more than fivefold from the legacy KRYSTEXXA account management team. We have now added 10 medical scientific liaisons to engage with key opinion leaders and the investments we are making today in education and outreach in an effort to share the robust safety and efficacy data from KRYSTEXXA pivotal trials are now helping us build a strong long-term foundation.

We have also submitted several abstracts for presentation at the American College of Rheumatology meeting in November.

It has been three years since KRYSTEXXA data has been discussed at any major medical meeting and we see the ACR meeting as an opportunity to reposition the medicine the right way to key gout stakeholders including opinion leaders and community practitioners who are beginning to better understand the true value of this important medicine.

To that point, we are also working to expand the clinical profile of KRYSTEXXA studying ways to potentially reduce immunogenicity from KRYSTEXXA therapy. The TRIPLE trial is well underway to assess reduction in immunogenicity following an increase in the frequency of dosing versus the original clinical program. TRIPLE has also been expanded to evaluate patients with increased weight. Data from this investigator-initiated trial will also be submitted to the ACR meeting as well and Jeff will discuss this in more detail.

We see a meaningful and exciting opportunity ahead to treat patients who suffer from painful chronic refractory gout. We expect to see accelerated volume growth in the second half of this year as a results of our expanded commercial and clinical education efforts come through.

In our primary care business unit, second-quarter sales increased 33% year-over-year driven by continued outperformance of PENNSAID 2%, our topical NSAID medicine which is sold by both our primary care and rheumatology sales forces. Sales of PENNSAID 2% were $72.7 million in the quarter, an increase of more than 30% sequentially and nearly 150% year-over-year, driven by rapidly accelerating year-over-year prescription growth.

As expected, our gross to net sales percentage for our primary care medicines for the second quarter was approximately 76% versus 79% in the first quarter of 2016 and in line with our full-year gross to net guidance range of 75% to 80%. Our average net realized price or ANRP for the primary care business improved from the first quarter as well as noted in our investor slide presentation which John mentioned was posted to our website this morning.

The ANRP for DUEXIS, VIMOVO, PENNSAID and RAYOS was $505 in the second quarter, up from $411 in the first quarter of 2016.

Finally, let me update on our discussions with PBMs and payers. As we have discussed over the last several months, our mission has been to ensure broad access to our primary care medicines. This has led us to put significant focus on continuing to secure formulary access for our primary care medicines and key payers and PBMs. It was our goal to secure at least one major PBM agreement going into 2017 and we accomplished that last week when we announced that we secured formulary status four DUEXIS and VIMOVO with one of the largest PBMs, CVS Caremark. As we mentioned, DUEXIS and VIMOVO will be removed from the exclusion list starting on January 1, 2017.

It is estimated that Caremark represents about one-quarter of total covered lives in the United States and this arrangement provides sustainability for our primary care medicines, DUEXIS and VIMOVO, stabilizes our gross to net percentage and most importantly, significantly improves access to our medicines for potentially thousands of new patients. This further strengthens our ability to deliver sustainable cash flows and enhances ability for physicians to get the right medicine in the hands of the patients they prescribed it for.

We expect this arrangement will be neutral to our gross to net range of 75% to 80%. With gross to net stabilized, we can do what we have proven we can continue to do which is to execute commercially and drive sales growth by driving high prescription volume.

We continue to have discussions and negotiations with other PBMs and payers and we will communicate any updates as appropriate.

With that, let me turn the call over to Paul to review our financial results for the quarter in more detail. Paul?

Thanks, Tim. This morning we provided information in our second-quarter earnings news release and on the investor portion of our website that reconciles our GAAP results to certain non-GAAP financial measures. Therefore my comments will mainly focus on our non-GAAP results. Please review our earnings news release for the GAAP reconciliations.

Today we reported record second-quarter net and sales adjusted EBITDA both of which exceeded our previous guidance and Street expectations. Net sales were $257.4 million, an increase of 49% versus the second quarter of 2015.

Sales growth was driven by strong performance across our business units. Adjusted EBITDA in the second quarter was $121.1 million representing 47% of sales, an increase of 59% over the second quarter of 2015. We are also confirming our full-year 2016 net sales and adjusted EBITDA guidance this morning with net sales guidance of $1.025 billion to $1.050 billion and adjusted EBITDA guidance of $495 million to $510 million.

Now I will review the operating section of the income statement in more detail. As a reminder, I will refer to non-GAAP results with the reconciliation of the non-GAAP results provided in our earnings news release this morning.

Second quarter non-GAAP gross profit margin was 92.0% of sales and we continue to expect our non-GAAP gross profit margin for the full-year 2016 to be in the range of 91% to 92%. Total non-GAAP operating expenses were $115.6 million or 44.9% of sales in the second quarter which as expected, declined as a percentage of sales from the first quarter of 2016 when total non-GAAP operating expenses represented 55.3% of sales.

Non-GAAP R&D expense in the second quarter was $8.5 million. This was a similar level of investment as the first quarter of 2016 following the completion of enrollment in the ACTIMMUNE Phase 3 FA trial in May and the RAVICTI SNDA submission in June. We continue to expect full-year 2016 non-GAAP R&D investment to be in the mid-single digits as a percentage of sales as we increase our investments related to ACTIMMUNE FA Phase 3 data analysis and a potential first-quarter 2017 SBLA submission, the ongoing Phase 1 dosing trial for ACTIMMUNE in certain cancers and continued clinical investments in KRYSTEXXA.

Non-GAAP sales and marketing expenses in the second quarter were $72.4 million or 28.1% of sales and non-GAAP G&A expense was $34.7 million or 13.5% of sales. Both line items declined as a percentage of net sales versus the first quarter of 2016. We continue to expect our expanded commercial efforts in rheumatology and primary care to drive prescription growth of our medicines in the second half of the year.

Next I will turn to the presentation of income taxes. As noted in our earnings release this morning, we are modifying the method of calculating our non-GAAP income tax expense to align with non-GAAP guidance issued by the SEC on May 17 of this year. We have provided both in our news release and our website a comparison of our non-GAAP income tax expense, non-GAAP tax rate, non-GAAP net income and non-GAAP diluted earnings per share for 2015 and 2016 using both the prior and new methodologies. Beginning next quarter, we will exclusively use the new methodology.

We have historically presented our non-GAAP net income and non-GAAP diluted earnings per share using non-GAAP income tax expense based on the estimated cash taxes that we expected we would pay for the period and disclosed a cash tax rate reflecting this amount as a percentage of the non-GAAP pretax income.

This quarter we started calculating our non-GAAP income tax expense by adjusting the GAAP income tax expense for the estimated tax impact of each non-GAAP adjustment based on the statutory tax rate of the applicable jurisdiction for each non-GAAP adjustment. Please note that this new methodology does not reflect any use of net operating loss carry forwards that we potentially may have been able to use if our actual earnings for these periods had been the non-GAAP net income. Importantly this change has no impact on the amount of cash taxes paid, operating cash flows or our full-year guidance for adjusted EBITDA.

Let's move on to our second-quarter tax rate which I will provide using both methodologies. Using our prior methodology, the non-GAAP tax rate was 5.1% while under the new methodology the non-GAAP tax rate was 14.4% for the quarter. Using the new methodology, we are now projecting a non-GAAP tax rate in the midteens for the second half and full-year of 2016. And as we have said before, future acquisitions may impact our forecasted non-GAAP tax rate and we will provide our guidance -- we will update our guidance as appropriate.

Next I will move on to our second-quarter non-GAAP net income and diluted earnings per share in a similar fashion, using both the prior and new non-GAAP tax methodologies. Using the prior methodology which resulted in non-GAAP income tax rate of 5.1%, non-GAAP net income and diluted earnings per share in the second quarter were $101.1 million and $0.62 respectively, well ahead of Street expectations. Sell-side analysts modeled the second quarter as we had previously guided using a low single-digit full-year cash income tax rate. Using the new methodology resulted in a non-GAAP net income tax rate of 14.4%, non-GAAP net income and diluted earnings per share were $91.3 million and $0.56, both also exceeding Street expectations despite the higher non-GAAP income tax rate.

The weighted average diluted shares outstanding used to calculate non-GAAP diluted earnings per share in the second quarter of 2016 were 163.9 million shares. For 2016, we continue to expect our weighted average diluted share count to be approximately 170 million shares outstanding.

Now let me provide a few high-level comments on our cash flow and balance sheet as of June 30, 2016.

Regarding cash flow, GAAP operating cash flow was $47.3 million in the second quarter of 2016 and we generated $101.5 million of GAAP operating cash flow for the first half of 2016. Non-GAAP operating cash flow was $58.2 million in the second quarter and $126.1 million for the first half of 2016 as compared to $66.4 million in the first half of 2015.

Cash flow in the second quarter was impacted significantly by the timing of interest and tax payments. Normalizing these interest and tax payments evenly over the first two quarters, our second-quarter non-GAAP operating cash flow would have been significantly higher than the first quarter. In addition, operating cash flows were impacted by timing of payments to vendors and collection of receivables from customers.

Cash and cash equivalents were $425 million as of June 30. The total principal amount of debt outstanding was $1.271 billion as of June 30 which is composed of $396 million in senior secured term loans with an interest rate of 4.5% due in 2021; $475 million and 6 5/8% senior notes due in 2023; and $400 million of 2.5% exchangeable senior notes due in 2022. This capital structure results in a weighted average cash interest rate of approximately 4.7%.

As of June 30, our net debt the last 12 months adjusted EBITDA leverage ratio was strong at 1.9 times. Based on net debt of $846 million and our 2016 adjusted EBITDA guidance of roughly $500 million, our leverage ratio would be approximately 1.7 times.

I will now turn the call over to Bob.

Thanks, Paul. Let me provide you with our latest thinking regarding our access to capital and the M&A environment.

First of all, we have a strong balance sheet and continue to generate strong annual operating cash flows and adjusted EBITDA and have one of the lowest leverage ratios in our sector. We believe this provides us with flexibility and additional debt capacity and puts us in good position to execute on future transactions.

We have clearly seen an evolution in the market over the last 12 months and it has taken time for management teams, boards of directors and investors to adjust. However, based on our experience, seller's valuation expectations increasingly appear to be aligning with the realities of the current market.

Biopharma M&A volume started to pick back up following a pause late last year and earlier this year due to significant market volatility. Recent catalysts and increased market stability have reignited activity. We continue to have fruitful and positive discussions about the real value of the assets available for acquisition. The financial markets appear accessible as we look to consummate additional transactions this year and generate long-term value creation for our shareholders.

Our business development strategy continues to evolve. We remain focused on acquiring clinically relevant assets and have prioritized orphan and specialty assets that are accretive and at present value positive. At the same time given our strong commercial foundation and increasingly global footprint, we have expanded our criteria to include potential late stage development assets particularly those for rare diseases. At a high level, we are striving to create sustainable franchises composed of medicines, demanding reimbursement based upon the benefits these medicines provide the patients and to the healthcare system.

Finally, we have visibility on several actionable opportunities and look forward to communicating with you soon.

Now I would like to turn it over to Jeff.

Thank you, Bob, and good morning, everyone. I will provide an update on our clinical development program for our orphan medicines and upcoming milestones.

Let's begin with RAVICTI which is indicated for urea cycle disorders or UCD, an ultra orphan disease that impacts about 2000 patients in the United States primarily children. We have an opportunity to help many more patients with UCD and in June submitted to the FDA supplemental new drug application or SNDA for RAVICTI to expand the age range from patients two years of age and older to patients two months of age and older. This submission is consistent with our approach to invest in clinical development or existing medicines to expand their use to more patients with devastating diseases.

Through our work with healthcare professionals in the UCD community including patients and their caregivers, we have learned that UCDs often strike early in a child's life and can be extremely challenging to manage if not life-threatening. In response, several studies were conducted evaluating the safety and efficacy of RAVICTI in very young children. We will now work on obtaining approval of the SNDA so the age range for RAVICTI can be expanded to include patients as young as two months of age.

Also we anticipate submitting an SNDA to expand the RAVICTI age range to include patients from birth on in the first quarter of 2018. Additionally, we recently initiated a manage access program in select European countries for people living with UCD. Where local health authorities permit, this program will allow healthcare professionals access to RAVICTI while we work through country by country plans to make RAVICTI commercially available in Europe which continues to be expected in 2017.

Now let's move on to ACTIMMUNE which is in Phase 3 development for Friedrich's ataxia or FA, a debilitating neurologic disease with no FDA approved treatment.

We completed enrollment in our Phase 3 STEADFAST trial in May with no patient screen failures and no loosening of patient eligibility criteria. This was a result of the successful partnership we have with the Friedrich's Ataxia Research Alliance, or FARA, which has a robust registry of FA patients including 1500 in the United States. We continue to expect to have topline data from this FA study in late December of this year.

I will now take a moment to review the specifics of the STEADFAST Phase 3 trial including the trial design, patient population, primary endpoint and other important details.

We have worked closely on the trial design of this study with FARA and David Lynch, the principal investigator for the Collaborative Clinical Research Network or CCRN for FA. Dr. Lynch is located at the Children's Hospital Philadelphia (CHOP), and we collectively reviewed the trial design with the FDA as part of the IND submission process. STEADFAST is a randomized double-blind placebo-controlled Phase 3 trial and enrolled a total of 92 patients as of May 5 at four top FA centers across the country. These patients were randomized to either ACTIMMUNE or placebo with a dose of up to 100 micrograms per meter squared. This is double the dose of a Phase 2 trial with 50 micrograms per meter squared.

The dose was increased in the Phase 3 trial based on reports from Europe of improvement in treatment effect in FA with a higher dose. In the Phase 3 trial, the dose was titrated upward and administered at night to minimize the possibility of flu-like side effects.

Based on the inclusion criteria, patients enrolled in the trial are between ages 10 and 25 and has disease rated greater than Stage I and less than Stage V of the Friedrich's ataxia. This was to ensure that patients were neither too early on in their disease nor too severe to better assess treatment effect.

The primary endpoint is the modified Friedrich's Ataxia Rating Scale or FARS score at six months of treatment. The FARS and neuro is a straightforward objective validated measure that assesses functional parameters such as speech, ability to swallow, upper extremity, lower extremity, coordination, gait and posture from a baseline measure. This modified endpoint removes components viewed by the FDA to be more subjective such as the peripheral nerves assessment.

The trial is sized conservatively based on the Phase 2 trial results and possible placebo effect based on other FA studies in terms of projected FAR scores difference and the standard deviation to achieve a conventional 80% power at 0.05 significance level for an approximate 3 points difference in the score between the treatment groups.

Working with FARA, we rigorously train the physicians conducting efficacy and safety assessments to help ensure high consistency and evaluation across the sites in the study. The physicians who are conducting efficacy assessments do not conduct safety assessments. This helps reduce potential bias.

With the last patient enrolled in the trial on May 5 and with a six-month treatment end point and two-week follow-up period, we expect the database for the study will be locked at the end of November or early December. To date nearly 60% of the 92 patients have completed the six-month treatment. From there, the data will be analyzed and we expect to have topline data available toward the end of December of this year.

Assuming positive results, we anticipate a late first quarter 2017 SBLA submission. If we receive a priority review given fast-track status, we could potentially have approval by third quarter of 2017. We would know if priority review was granted approximately 60 days following our submission.

In addition, all patients in the phase 3 pivotal trial have the opportunity to roll into the extension study evaluating the long-term safety of ACTIMMUNE for FA for an additional 28 weeks. To date, 96% of the patients have decided to enroll into this open label extension.

ACTIMMUNE is also being evaluated in a Phase 1 trial in combination with a PD1 inhibitor in various forms of cancer including bladder and kidney cancer. Preclinical research has indicated that interferon gamma could potentially enhance the effect of PD-1 and PD-L1 inhibitors thus potentially improving cancer patient outcome.

Through our research collaboration with the Fox Chase Cancer Center, we hope to gain a better understanding of this combination. The first six patient cohort was completed in May and a second six patient cohort is now enrolling. We anticipate data from this trial in 2017.

Let me also provide an update on KRYSTEXXA including the work we have done in the last several months with several key opinion leaders to further analyze and interpret KRYSTEXXA Phase 3 trial data. I will also provide an update on the TRIPLE trial which is an investigator initiated study underway to evaluate immunogenicity. As we have learned more about this medicine in the chronic refractory gal patient population, the TRIPLE trial has been expanded to include additional subsets of patients.

Let me first provide you with some context regarding the existing Phase 3 KRYSTEXXA data. What is typically completed following pivotal clinical trials for medicine are numerous analyses that are used to provide additional information to clinicians to ensure the data is easily understandable and usable to the practicing physician. These analyses are disseminated through a variety of vehicles including data presentation at medical meetings and peer reviewed publications. This unfortunately did not happen for KRYSTEXXA and as Tim mentioned, this medicine has not been discussed in a medical meeting in three years. Practically speaking, there has been a vacuum of information on KRYSTEXXA within the gout treatment community. This is unfortunate for patients suffering from chronic refractory gout but it does represent an opportunity for Horizon Pharma to invest in education and outreach to share the robust safety and efficacy data that exists for KRYSTEXXA.

Since January, our Medical Affairs team has been doing just that by working with key opinion leaders to dive deeper into the data. As a result, multiple abstracts have been submitted to the American College of Rheumatology or ACR meeting in November and we are hopeful that many of these abstracts will be accepted which will bolster our ability to reposition KRYSTEXXA to practicing clinicians properly based on many of our key learnings to date.

The TRIPLE trial as I mentioned is evaluating immunogenicity as it relates to KRYSTEXXA both from a safety and efficacy perspective. The development of an immune response or immunogenicity is relatively common with biologic medicine and it is standard to evaluate tolerization either by increasing the frequency or the amount of drug dose based on different patient types. The TRIPLE trial was initiated in January to evaluate increased frequency of dosing of KRYSTEXXA from every other week to every week for the first three weeks of treatment.

TRIPLE is an investigator-initiated trial and has been evolving through multiple iterations since January. As we have learned more by reviewing the Phase 3 data and TRIPLE study data to date, we have continued to expand the trial to additional patient subpopulations. This includes the recent expansion to evaluate patients with increased body weight by giving them a higher dose of KRYSTEXXA for the first week versus the standard 8 milligram dose. The addition of the other patient populations to the TRIPLE trial depending on study data will help us more fully characterize patient response.

In addition to the safety portion of the trial, the incidence of infusion reactions is also being assessed. Fusion reactions are highly correlated with patients that did not fully respond to treatment and those patients that are developing antibodies to the medicine. Given the evolution of the trial with additional subpopulations, data from the ongoing TRIPLE trial will be submitted as a late breaking abstract for the ACR meeting in November. I look forward to sharing more with you about this program and our other clinical development programs as they advance.

With that, I will turn the call back over to Tim.

Thank you, Jeff. To summarize our progress in Q2, we exceeded expectations for the second quarter with record net sales and strong adjusted EBITDA. We continue to track toward our full-year 2016 net sales and adjusted EBITDA guidance. We secured coverage status with DUEXIS and VIMOVO with CBS Caremark and we are having continued negotiations with other PBMs and payers.

We are delivering on our core principles, strong commercial execution, clinical development of medicines for patients in need, expanding patient access while ensuring affordability of our medicine along with a disciplined acquisition strategy. Moving forward, we will continue to drive and motivate our growing organization with the goal of delivering exceptional financial performance that creates market-leading shareholder value.

With that, we will now open it up for questions. John?

Abigail, do want to open up for us please?

(Operator Instructions). Marc Goodman, UBS.

This is Ami Fadia on behalf of Marc. Could you tell us a little bit more about the commercial experience with KRYSTEXXA? What are you doing differently from the previous owner and what is the feedback you are getting from the market? Thanks.

This is Tim. A number of things. First, we increased promotional efforts fivefold from 15 specialty account managers to currently 43. We have added 10 medical liaisons, significant increased the communication in both the safety and efficacy data. We have begun the TRIPLE trial which we believe will help physicians and ultimately patients better understand the immunogenicity of the medicine. And in early May, we had this organization out for the first time in full force. So we have seen a strong increase in benefits, investigations which is when each rheumatologist is increasing the number of patients that they see as potential for KRYSTEXXA. They sent it into the reimbursement hub to determine if the patient has reimbursement and as that accelerates we see acceleration of that from those investigations into actual patients treated.

So for the first time we will have submitted data in three years to a key congress such as the ACR where we can better communicate both the safety and efficacy of the medicine. So we think we are off to a good start and we expect things to accelerate through the second half of the year and beyond.

Also could you give us a little bit more color on what type of physicians are using KRYSTEXXA and what type of feedback you are getting from them? Thank you.

Rheumatologists use KRYSTEXXA and the feedback we have been getting is it really -- one of the key things that we have learned from our experience and also in monitoring past usage of KRYSTEXXA is how critical the dialogue between the rheumatologist and the patient is. And really educating rheumatologists to help patients understand that the next six to nine months of treatment are going to be critical in breaking down those crystals in the patients joints and essentially cleaning house. So you have a build up and bulking of crystals and that causes all of the signs and symptoms and ultimately damage that patients get.

It is really a partnership that the rheumatologist has to join with the patient and help them through that initial phase. Because as you are clearing out those crystals, some patients may have increased flares which are really part of the healing process. The biggest effort is that educational process and as physicians do that more and more, we get better and better response that these patients are signing up for what is a short-term challenge to get to a long-term benefit for their gout symptoms.

So that feedback has been really received well and our commercial organization is fostering that communication in a way that hadn't been done before.

Thank you.

Stephan Stewart, Goldman Sachs.

Just wanted to ask one question on the CVS formulary coverage expansion. It felt like it is going to be neutral to gross to net but just wondering if you guys can give some sense on what you think this can do to volumes. CVS is known to be very stringent around its formularies, have higher controls. Just wondering how that is going to play out versus HorizonCares -- especially with it being a nonpreferred part of the formulary?

So nonpreferred essentially means that the typical hurdles that are in place for prescribers continue that they have to have taken a generic medicine. So every patient that is prescribed DUEXIS, VIMOVO or PENNSAID has failed a generic medicine. So a lot of the hurdles that are in place are consistent with what we have seen in our control through co-pay and other mechanisms.

As we look at it, it doesn't really change the patients that are under Caremark coverage. It does free up and really with the overall goal of our HorizonCares program which is minimize the overall noise in the physician's office in dealing with the challenges that they face across a multitude of managed care plans, trying to figure out what formulary covers what medicines.

HorizonCares program has gone a long way to eliminating that challenge for physicians, allowing them to prescribe the medicine they believe is best for their patients. So we see it really minimizing the noise and other formularies where they typically prescribe to the most challenging formulary, that that formulary status opens up; it frees them up to prescribe across a broader set of patients.

So when we look at specifically Caremark, that falls within our existing 75% to 80% gross to net guidance. But we do believe as we get broader formulary coverage for our medicines, it frees up our reps that do what they do best which is continue to drive prescriptions.

So just on that note, can you give us some sense as to how broad your payer discussions are for this year; maybe some percentage of the market. We know CVS and Express, but how much broader can those discussions go this year?

Well, there are four PBMs that make up over 80% of the market, and we are having dialogue with the PBMs that make up the market, and also key payers that make up a substantial portion of the market as any company would at this point in time. So we are doing what everyone would expect, having dialogue negotiations, and as we get results we will communicate them.

Great, thanks for the questions.

Annabel Samimy, Stifel.

Thanks for taking my question. Just a clarification on a PBM issue. Does HorizonCares still exist for these patients who are under CVS Caremark coverage? Are you still going to provide the patients for co-pay assistance, etc., or are you limited from doing that with the CVS contract?

I have a separate question on KRYSTEXXA.

So HorizonCares is really about ensuring patients get the medicines at a target of $10 or less and that will continue.

Okay. So you are going to continue to pay it down and if there is any patients who don't have -- I guess who have increased restrictions on CVS Caremark, you will still be able to provide that level of support?

So HorizonCares is there as a program to really cover patients who aren't covered by their existing plans and that will continue.

Okay. And then separately on KRYSTEXXA, unfortunately I forgot my question on KRYSTEXXA. I will follow up later.

Gary Nachman, BMO Capital Markets.

Good morning, guys. So on the gross to net, we saw some improvement in 2Q and you are still confident you will be in the 75% to 80% range for the year. Do you expect to stay in the lower end of that range in the second half and where do you think gross to net could trend longer-term? Could it get into the low 70s or maybe even the 60s?

We expect it in the near-term and long-term to be in the 75% to 80% range. If you look at the first quarter, it was for DUEXIS, VIMOVO, PENNSAID and RAYOS; first quarter was 75.8%. It dropped to 75.1%. Across brands it was a little over 81% for DUEXIS, a little under 81% for VIMOVO, PENNSAID was under 66% and RAYOS about 57%. So the wide range across the medicines we expect the range in the short- and long-term to maintain the 75% to 80%.

If you look at for ACTIMMUNE and RAVICTI, it was slight moderation in the second quarter, most of that driven by Medicaid. The gross to net for both those medicines are primarily driven by the variation in percentage of Medicaid coverage on a quarter-over-quarter basis.

Importantly also the average net realized price as I mentioned in my remarks decreased from $505 to $411 and when we look at the business, we look at it from -- or increased -- so from volume versus price since Q2 of 2014 over the last eight quarters, you have seen 173% increase in volume versus 8% in price. So annually our primary care medicines on a net basis are increasing 4% and the goal of our pricing program is to maintain the average net realized price versus realizing significant price increase.

That was very helpful, Tim. And then on ACTIMMUNE, I am just curious are there any interim looks before the six-month data at the end of the year? Are you guys getting updated on safety? And just remind us how you would expect to commercialize that indication if you'd use the same reps?

So there are no incremental looks or looks along the way because this has been on the market for 20 years, we don't expect any safety issues to come up that wouldn't have been seen over the last 20 years. So there was nothing that we see on a regular basis. We will get the data and last patient in will be in November and then in December we will have the results toward the end of the year. So as far as commercialization, we expect to field a salesforce that is focused directly on Friedrich's ataxia. We won't be having other salesforces that promote ACTIMMUNE and other indications focused on that. You are talking about different prescribing audiences and as we get closer, we will communicate the level of that promotional effort.

Okay, but it would be additional reps in addition to the ones you have today. You wouldn't pull from somewhere else?

We will not. We don't see that as a large number. Obviously you are dealing with 3700 patients that can be seen by as few as 20 to 30 key institutions. So you can do the math from there. It is small overall numbers that are involved.

Okay, thanks a lot.

Louise Chen, Guggenheim Securities.

It is Brandon Folkes on for Louise. On KRYSTEXXA, when do you expect to see the upward inflection point from the investments in the salesforce and key data? Thank you.

We continue to see increasing data. Our reps have been out there for about eight, nine weeks at this point in full force. We have seen about a 37% increase in benefits, investigations over that period and we see continued effort in accelerating from benefits investigations through to patient treatment. So that process continues and we are going to expect to see sequential growth to continue to pick up.

This is not something where you see the 60%, 70% year-over-year prescription growth like we have seen with PENNSAID and other medicines but that strong benefits investigation which results promotional effort and transition to patients taking KRYSTEXXA is something that we expect to continue to see acceleration over the next several quarters.

Great, thanks very much.

Donald Ellis, JMP Securities.

Thank you, good morning, everyone. A couple of questions. First of all regarding the first quarter was difficult for the entire drug industry and the second quarter appears to be much better. Are you seeing more predictability and visibility in market dynamics for the rest of this year?

And then second question, it appears that your inventory levels have come down a little bit in the quarter even though revenue increased significantly quarter over quarter.

The last question is about 2017, not asking for guidance but you guys are setting up a lot of positive events for 2017. Can you add some color around what ACTIMMUNE worldwide rights in 2017 could have? And in your discussions with the PBMs, is PENNSAID and RAYOS part of those discussions? That is it. Thank you.

So first from a market standpoint, I think for us the overall prescriptions in primary care were up sequentially 22% from the first quarter and strong acceleration of our orphan business with the orphan medicines making up 36%, about an 8% year-over-year in total percentage increase. So I don't know that for our industry we can ever say that there is a long-term stability. You've just got varying levels of managed care and payer changes that are continuing to occur. I think the key thing is that companies continue to execute through that. We are able to really strongly execute through the second quarter and now we have to continue to do that. So to me it is a month by month, week by week battle out there and every company is continuing to focus on that.

From an inventory standpoint, inventories did I think across the board -- I don't have individual products in front of me but the inventories were relatively low by probably a day or two here and there per brand. Paul, I don't if there's anything specific there but as it flows it flows.

They are down roughly $8 million from the first quarter and some of that is just the step up that we had to book because of GAAP accounting on KRYSTEXXA that was a significant increase in that inventory from a GAAP basis.

And then lastly relative to 2017 as we look at our effort, whether that be with driving prescriptions, driving HorizonCares or ensuring PBM formularies, our goal is to put ourselves in a position to continue to educate physicians and help them see the benefits of the medicine. So beyond that, I'm not going to comment on our business for 2017. We will most likely be communicating that after we get our Friedrich's ataxia data at the end of the year. So for us relative to ex US and the acquisition of interferon gamma-1b, which is ACTIMMUNE, we will communicate our plans ex US after we receive data for the FA indication late this year. So all of that will be pending.

David Amsellem.

By the way, before we continue, Annabel had a question on HorizonCares. Just to make it clear, it will still be used even with CVS Caremark patients. Is that right?

Yes. (inaudible)

David Amsellem, Piper Jaffray.

So a couple of questions or I may have missed this but I want to see if you can put some patient metrics around ACTIMMUNE and RAVICTI in terms of the number of patients that are on therapy versus where you were in 1Q or at the beginning of the year? And also RAVICTI specifically, percentage of patients that have now converted from BUPHENYL?

And then also on KRYSTEXXA, I think when the Crealta deal closed you had talked about the number of patients that had been treated to date. Can Maybe provide some color on where that number is now and if you have seen a natural spike in the number of patients treated with the greater sales and marketing resources you put behind the product? Thanks.

So to number of patients I think on a quarter-by-quarter basis on a net -- let me just pull the numbers here -- I think it is about 290 patients which are net about 5 versus the first quarter. For RAVICTI, it is about 375 on medicine versus about 360. So we continue to see that grow.

When we first moved the BUPHENYL patients over to our reimbursement hub several quarters ago, there were about 100 of them I would say that about 30% of them have now been moved over and converted over to RAVICTI so we continue to make progress with that group.

Relative to KRYSTEXXA, what we have seen occur, David, is the first quarter we continue to see a decline coming out of the power company because of low performance on a sequential basis. Second quarter, we really stemmed that decline and I think we have really positioned the medicine to begin to increase in subsequent weeks, months and quarters. So at this point, it has been stabilized. It had been declining for the last probably 12 to 18 months as it had transitioned from prior owners. We have now stabilized that and we expect to see and growing from here.

Then I'm going to ask -- sneak in a quick follow-up just on the BD front. So you talked about prioritizing orphan and specialty but now that you are putting yourself on better footing with the big payers, how does that change your view of primary care focused assets? In other words is that an area where you might reprioritize going forward now that you are stepping up your contracting activity?

Nothing changes. Our focus from a business development standpoint is on the orphan and specialty space and we'll continue to stay focused on that. We see long-term sustainability with our permanent care business as you mentioned and any think contracting and signing longer-term agreements will stabilize for that and continue that strong cash flow generation that will fuel our effort to diversify more into becoming orphan and specialty focused.

Okay, thanks.

David Steinberg, Jefferies.

Good morning. A question on BD, I think Bob, you had said that seller expectations are now coming in line with market conditions which is good to hear if that is the case. In the past you said you are largely looking for smaller type acquisitions. Is that still the case or perhaps could you go larger and if so what would be the highest capacity you'd have to do a fairly large transaction?

We have been looking across the board. We don't try to limit ourselves by the size. What we are looking at are good opportunities whether they are bolt-on acquisitions or whether they are transformative and the transformative ones can be multibillion-dollar deals. Those are hard to pull together, the risks associated with them are high. But we keep an open mind and we are trying to build a business here in as rapid a fashion as possible while adding shareholder value. So we don't want to close off avenues of possibly doing that.

So most of the activity though is on transactions where we could add products or companies that would be more in line with what you would expect. But I think today we have got debt capacity if we wanted to stretch it $1.5 billion to $2 billion, we are probably operating well within that on the things that we are looking at. Tim?

That is good. I was going to get to that. Paul, our net leverage ratio is about 1.9 right now? Gross is 2.8 I think?

For the year 1.9 is the gross, 1.7 net.

Just a quick follow-up. Are you seeing similar views from both private and public companies?

And then just getting back to Gary's question about interim look, in the first FA study it showed a positive response very early on within three months in positively impacting the [PROTACs] protein. And I was just curious, given this is a longer study is there a chance that the FDA is seeing the data real-time could potentially stop the study early if they are seeing very good results?

There is no data safety monitoring board that would have any interim look, no one at the company or FDA or anyone will see data until late December. So there is no ability to access it. This is a six-month trial versus the three-month and it is double-blind both in the six-month period as well as being double-blind in the six-month extension period. So no one in the company nor FDA has any access to any interim data of any type.

Okay. Thanks.

Irina Koffler, Mizuho.

Thanks for taking the questions. I had a couple. One on pricing, now that you are contracting with CVS, could you comment on the Company's general philosophy on pricing if it is changing at all in the primary care business or kind of more of the same as we have seen before? And I don't know if I heard this but did you comment on what percent of your patients are covered by CVS? Thanks.

So I will start at the end, Irina. About 25% of prescriptions across the industry are for Caremark and we see that is approximately the same for us. When it comes to pricing, I will go back to what our history has been and if you look at net pricing has increased about 4% annually over the last two years for a net 8% price over two years with 173% increase in volume. So we expect to continue to drive volume and have nominal net pricing over the course of current and future.

Okay. Do we have a sense of the cadence of when we are going to find out about more of the contracting going forward? For example, do we know if there has been an increase in more closed formulary plans?

So as far as timing, I would expect between now and the end of the year is when that will occur. As far as plans and incremental changes that they may be putting in place for 2017, I think there is a lot of plans looking at various different options and we continue to be in dialogue with them.

As far as what that looks like in controls, I think that it is hard to really understand that right now as a lot of the payers and PBMs are going through open enrollment periods where they will present both their current and any changes they have in their plans and whether employers agree or sign-up for more controls or less controls. So I think we have to let the marketing period play out over the next several months and that will really dictate what 2017 ultimately looks like from a mix of controls.

There are some plans as we have had discussions and many others have commented that are looking at additional controls. But in the end we have to see what employers do, how they view that, what they sign up for and we will see that read out over probably the next quarter or two of calls from payers and PBMs.

Okay, great. Thank you.

Ken Cacciatore, Cowen and Company.

This is Tyler on for Ken. Good morning and congratulations on the great quarterly results. Curious to hear more about the specifics of the process that led up to the CVS agreement. Specifically how long did it take? What were some of the important factors that both sides were considering? And around the same time of the CVS agreement, you all issued an 8-K and mentioned Express Scripts. So curious to hear about what gives you confidence that a deal could be executed with Express maybe based upon what happened with the CVS process or potentially the ongoing process? Thank you.

Thank you, Tyler. I'm not going to comment on timing. We have ongoing dialogue throughout the year with PBMs and payers and I have been personally involved in those dialogues and I don't think that any dialogue between one PBM or payer is alike. It all depends on what their particular plans that they have in place, what level of projections that they have on any particular medicine. So really any conversation with a PBM is specific to that PBM or that payer and their own makeup of controls and how our medicines fit in.

So we continue to have dialogues, can't really predict what is going to happen with any payer or PBM other than we are having a dialogue and what I've found with all payers and PBMs is that there are constructive dialogues and we focus on helping understand the value our medicines can bring and hopefully we can work out some agreements. We obviously will not get all of them but we think that we will continue to have positive negotiations and discussions and we will see how it plays out.

I think we have time for one more question please.

David Risinger, Morgan Stanley.

Good morning. This is (inaudible) on the call for David Risinger. Congrats on the result and thank you for taking our questions. Just a follow-up on the CVS deal. Could you please characterize the balance of the impact of the CVS agreement on 2017 revenues? Specifically will the payment for previously (inaudible) prescriptions more than offset the substantial decline in currently reimbursed high-value prescription?

So relative to CVS, we haven't given any 2017 guidance other than we expect overall across our full primary care business that gross to nets will be in the 75% to 80% range.

Okay, thank you.

Thank you. Abigail, that concludes our call this morning. A replay will be available in approximately 2 hours by calling 1-855-859-2056. The passcode is 43465144. Thank you for your interest in Horizon Pharma and for joining us today. Please contact us if you have any follow-up questions.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.